Ethiopia’s IMF Deal Avoids the Common Pitfalls of Austerity

Recent concerns that Ethiopia’s new IMF-supported economic reform might trigger a cost-of-living crisis and public protests like Kenya’s are overblown. The following factors underscore why Ethiopia’s situation is distinct and why such fears may be exaggerated:

1. Pricing and Economic Adjustments: For years, Ethiopian prices have factored in the parallel foreign exchange rate, which is more than double the official bank rate. Due to constrained hard currency, a significant number of importers have relied on the black-market exchange rate. Moreover, according the National Bank Governor, Mamo Miheretu, “consumer price index(CPI) indicates 18% of consumer items are imported, with most of these items already priced according to the parallel (black market) exchange rate”. Only fuel and fertilizer are imported at the official bank rate and these are subsidized by the state. Fears of runaway inflation are exaggerated.

This advance adjustment will mitigate potential shocks. Indeed, Ethiopia’s foreign currency peg is the mother of all economic distortions and its longevity has meant its impact has been long established in current prices.

2. Strategic Negotiations Without Austerity: Ethiopia’s Finance Ministry and National Bank have been meticulous in negotiating the terms of the IMF deal, managing to secure funding without agreeing to stringent austerity measures. Notably, civil servant wages are set to increase, and capital investments will be prioritized, highlighting a commitment to economic growth and stability. The patience and resilience of Ethiopian authorities to seek a good deal, particularly while facing external and internal economic shocks, including the covid pandemic, and domestic conflict is commendable.

3. Supportive Measures for Workers: Contrary to austerity, Ethiopia’s agreement includes provisions for wage support and subsidies on essential goods such as fuel and fertilizer. These measures are designed to provide a buffer during the transition period, shielding the population from severe economic strain. Perhaps most importantly, Ethiopia’s macroeconomic reform plan, supported by the IMF does not short capital investment projects such as hydroelectric dams, roads, and other infrastructure. This is is not a budget cutting plan. It is in fact nudging towards productive spending.

4. Debt Management Success: Ethiopia has made substantial progress in managing its national debt. Through successful negotiations with key sovereign debt holders, including China and the Paris Club, Ethiopia has navigated its debt challenges effectively, receiving a critical repayment holiday from partners, while selectively defaulting on its Eurobond obligations, a strategic move meant to highlight fairness and equal treatment of all creditors.

5. Supporting Import Substitution: Ethiopia has made strides in developing domestic production, particularly in wheat and other food items. This focus on import substitution has helped to moderate food inflation. There are initiatives to bolster manufacturing of consumer goods. Nonetheless the new macroeconomic reform plan does call for removal of import barriers on 38 previously restricted items. These include human hair, fully assembled personal cars, motorcycles, jewelry, processed food, and more. These items however do not overlap with the list of items marked for import substitution, which are mainly food items and commonly consumed pharmaceuticals.

6. Learning from Regional Experiences: Ethiopia has carefully studied the economic challenges faced by Kenya and Nigeria during their IMF engagements, drawing valuable lessons to avoid similar pitfalls. This proactive approach underscores the country’s commitment to applying learned insights to its own reform process. Indeed, the wise learn from the mistake of others. Ethiopia is a bit fortunate in that these cautionary tales presented themselves dramatically and in short order.

7. Geopolitical Leverage Through BRICS and Currency Swaps: Ethiopia’s recent entry into BRICS and its currency swap agreements with the UAE have enhanced its negotiating leverage. Because after all, economics and geopolitics are intertwined, especially in this fast-developing multipolar world order. In this regard, reports from Pakistan’s recent economic situation has served an important lesson.

8. Long-Term Loan Guarantees: Following the advice of renowned economist Jeffrey Sachs, who recently traveled to Addis Ababa in an advisory role, Ethiopia has successfully negotiated for long-term, relatively low-interest rate loan guarantee. This strategic move ensures more manageable debt servicing and financial stability. 

9. IMF’s Recalibrated Approach: Suffering a public relations setback by recent anti-austerity protests in Kenya, the IMF has sought a more balanced approach in Africa. This shift in the IMF’s stance, aimed at avoiding further backlash, has worked in Ethiopia’s favor, allowing the country to secure a more favorable deal. In this regard we must thank Kenya’s activists for putting the onus on wrongheaded economic reform agendas crafted in Washington.

Ethiopia’s IMF-supported macroeconomic reform appears to be backed by careful planning and strategic negotiations to address potential risks and incorporate lessons from regional experiences. This multifaceted approach has positioned Ethiopia to navigate its economic transition with greater resilience, distinguishing it from other recent cases on the continent.

On Monday, the International Monetary Fund (IMF) announced that Ethiopia has reached an agreement for a new financing program valued at $3.4 billion. In the months ahead Ethiopia is expected to receive up to $10.7 billion. As part of this deal, the central bank has floated the currency, a crucial measure to gain IMF support and advance a long-awaited debt restructuring.

Earlier today the World Bank committed a total of $16.6 billion to support the economic reform Agenda.

Facing high inflation, unemployment, and persistent foreign currency shortages, Ethiopia was long overdue for a serious economic overhaul. It is now imperative for the country to tackle corruption and implement the political reforms needed to cement consistent and sustainable economic development.